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2 Reasons Why KLCC is Undervalued

It’s not everyday you get to see value emerged from Bursa Malaysia especially when current market is fueled by speculations. KLCC Stapled Group is Malaysia’s first stapled trusts which comprise of KLCC Property Holdings and KLCC REIT.

The Group owns and manages 7 properties that are strategically located at the center of Kuala Lumpur. Some of its most notable properties includes the Petronas Twin Towers, Suria KLCC, Menara Maxis, Menara Exxonmobil and Mandarin Oriental, etc.

KLCC's 1 Year Price Chart
Source: Google

Recently, its share price has been under some heavy sell-off from its peak of RM8.64 to RM6.88 per share at the time of writing. What is causing this sell-off and why it has not recovered since then? Here’s what you need to know before investing in it:

#1: PETRONAS REDUCING STAKES IN KLCC

The sell-off is caused by the Group’s major shareholder – Petroliam Nasional Bhd (PETRONAS). According to the Group’s announcement to Bursa, PETRONAS has sold 154m shares on 11 Dec 2020. The Edge Markets reported that the sell-off was at RM7.12 per share which was discounted by 5.7% from its closing price of RM7.55. This was probably for fund raising purposes as PETRONAS is paying dividend to our Federal Government.

With such discounted price, it also means that the sell-off is not through the open market. According to KLCC’s announcement to Bursa, Amanahraya Trustees Berhad – Amanah Saham Bumiputera has on 11 Dec 2020 bought 58.35m shares of KLCC. Probably they are one of the counterparties that bought the shares from PETRONAS.

#2: WORK-FROM-HOME TREND IS HERE TO STAY

While the sell-off in KLCC is caused by Petronas, it has not recovered since then. I think partly because of the work-from-home trend. According to the Edge Markets, a study has found that Malaysian business leaders prefer a hybrid work model in post covid. This means a combination of onsite and offsite work arrangements.

In my opinion, this could lead to businesses reducing their office spaces need in the future. As a result, we will see the oversupply of office spaces in Kuala Lumpur worsen. If this happens, office rental rates will decrease further.

KLCC derived most of its revenue and profit from office segment. As of 2020, office segment contributed approx. 48% of the Group’s total revenue. This is followed by retail segment, approx. 33%. The following is the breakdown:

KLCC's Segmental Revenue
Source: Company’s Annual Report

A reduction in rental rates will definitely affect KLCC’s financial performance and its future distribution per unit. Looking at its 5 year office revenue trend, it seems stable prior to covid-19 outbreaks. Moving forward, this will be a key area to monitor closely.

VALUATION – DIVIDEND YIELD

Regardless, the sell-off has made KLCC’s valuation becomes attractive. Dividend investors would be happy to add more shares of KLCC into their portfolio. For the past 7 years, KLCC’s average dividend yield (DY) stood at 4.7% while its highest DY were at 5.25% which was during the 2018 sudden REITs sell-off. Today, KLCC DY were at its highest – 5.52% based on 2019 dividend per share of RM0.38.

Dividend Yield Chart
Source: Shareinvestor.com

I did not take into account of 2020 dividend per share because the covid-19 outbreak is a temporary issue. It should not be considered when valuing a company for long-term investors. The idea is that in 1 or 2 years’ time, KLCC would have recover to its pre-covid performance. The dividend per share would be at RM0.38 instead of RM0.30 in 2020.

VALUATION – PB RATIO

KLCC’s DY was not the only valuation metric that shows value emerging. The Group’s Price-to-Book (“PB”) Ratio also show that it is attractive. The average 7 years historical PB Ratio stood at 1.1x while its current PB Ratio is at 0.95x at the time of writing. This means the current share price is lower than KLCC’s net asset value.

PB Ratio Chart
Source: Shareinvestor.com

MY INSIGHTS

KLCC is certainly trading at an attractive valuation. However, it has been like this for quite a while. This is because of the work-from-home trend as explained earlier. As such, this office segment needs to monitor closely before deciding to enter or sell a position in it.

Another thing to note is that KLCC is not a growth stock but an income stock. Investors looking for capital gains will be disappointed by this counter. This is because its share price performance has been hovering between RM7.50 to RM8.31 per share for the longest time. There is minimal capital gain from this counter.

KLCC's 5 Year Price Chart
Source: Google

Nevertheless, one cannot deny that KLCC is currently trading at undervalue price. A rare occasion indeed!

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Thomas

Co-founder of Stocks Insights. Prior to this, he was attached with medium-size audit firm for 2 years working as an external auditor where he has performed statutory audit on companies from various industries including oil & gas, retailers, manufacturing, industrial products & machinery, etc. He is also involved in Enterprise Risk Management exercise and the internal control framework review for entities undergoing a listing exercise on Bursa Malaysia and SGX Catalyst Board. He is also an ACCA member.

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